UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1997
-----------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-183
HERSHEY FOODS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-0691590
- ---------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Crystal A Drive
Hershey, Pennsylvania 17033
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 534-6799
----------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $1 par value - 122,297,699 shares, as of April 28, 1997. Class B
Common Stock, $1 par value - 30,470,908 shares, as of April 28, 1997.
Exhibit Index - Page 13
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
For the Three Months Ended
--------------------------
March 30, March 31,
1997 1996
----------- -----------
Net Sales $ 1,002,469 $ 931,514
----------- -----------
Costs and Expenses:
Cost of sales 589,281 549,748
Selling, marketing and administrative 284,005 270,352
----------- -----------
Total costs and expenses 873,286 820,100
----------- -----------
Income before Interest and Income Taxes 129,183 111,414
Interest expense, net 15,682 12,224
----------- -----------
Income before Income Taxes 113,501 99,190
Provision for income taxes 44,607 39,775
----------- -----------
Net Income $ 68,894 $ 59,415
=========== ===========
Net Income per Share $ .45 $ .38
=========== ===========
Cash Dividends Paid per Share:
Common Stock $ .2000 $ .1800
=========== ===========
Class B Common Stock $ .1800 $ .1625
=========== ===========
Average Shares Outstanding 152,838 154,627
=========== ===========
The accompanying notes are an integral part of these statements.
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 30, 1997 AND DECEMBER 31, 1996
(in thousands of dollars)
ASSETS 1997 1996
----------- -----------
Current Assets:
Cash and cash equivalents $ 77,284 $ 61,422
Accounts receivable - trade 245,651 294,606
Inventories 547,438 474,978
Deferred income taxes 98,037 94,464
Prepaid expenses and other 52,817 60,759
----------- -----------
Total current assets 1,021,227 986,229
----------- -----------
Property, Plant and Equipment, at cost 2,458,508 2,422,702
Less - accumulated depreciation and amortization (854,616) (820,807)
----------- -----------
Net property, plant and equipment 1,603,892 1,601,895
----------- -----------
Intangibles Resulting from Business Acquisitions 574,481 565,962
Other Assets 38,690 30,710
----------- -----------
Total assets $ 3,238,290 $ 3,184,796
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 122,005 $ 134,213
Accrued liabilities 355,950 357,828
Accrued income taxes 46,712 10,254
Short-term debt 276,158 299,469
Current portion of long-term debt 40,508 15,510
----------- -----------
Total current liabilities 841,333 817,274
Long-term Debt 629,856 655,289
Other Long-term Liabilities 328,630 327,209
Deferred Income Taxes 249,134 224,003
----------- -----------
Total liabilities 2,048,953 2,023,775
----------- -----------
Stockholders' Equity:
Preferred Stock, shares issued:
none in 1997 and 1996 --- ---
Common Stock, shares issued:
149,479,964 in 1997 and 149,471,964 in 1996 149,479 149,472
Class B Common Stock, shares issued:
30,470,908 in 1997 and 30,478,908 in 1996 30,471 30,478
Additional paid-in capital 39,099 42,432
Cumulative foreign currency translation adjustments (34,162) (32,875)
Unearned ESOP compensation (31,136) (31,935)
Retained earnings 1,802,086 1,763,144
Treasury-Common Stock shares at cost:
27,153,165 in 1997 and 27,009,316 in 1996 (766,500) (759,695)
----------- -----------
Total stockholders' equity 1,189,337 1,161,021
----------- -----------
Total liabilities and stockholders' equity $ 3,238,290 $ 3,184,796
=========== ===========
The accompanying notes are an integral part of these balance sheets.
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Three Months Ended
--------------------------
March 30, March 31,
1997 1996
----------- ---------
Cash Flows Provided from (Used by) Operating Activities
Net Income $ 68,894 $ 59,415
Adjustments to Reconcile Net Income to Net Cash
Provided from Operations:
Depreciation and amortization 40,124 33,109
Deferred income taxes 21,558 5,230
Changes in assets and liabilities, net of
effects from business
acquisitions and divestitures:
Accounts receivable - trade 48,955 86,852
Inventories (72,460) (49,686)
Accounts payable (12,208) (5,190)
Other assets and liabilities 39,594 (7,968)
Other, net 594 301
--------- ---------
Net Cash Flows Provided from Operating Activities 135,051 122,063
--------- ---------
Cash Flows Provided from (Used by) Investing Activities
Capital additions (38,017) (36,017)
Proceeds from divestitures --- 15,852
Other, net (13,181) 2,872
--------- ---------
Net Cash Flows (Used by) Investing Activities (51,198) (17,293)
--------- ---------
Cash Flows Provided from (Used by) Financing Activities
Net (decrease) increase in short-term debt (173,311) (42,150)
Long-term borrowings 150,000 ---
Repayment of long-term debt (46) (1,311)
Cash dividends paid (29,952) (27,307)
Exercise of stock options 4,104 9,578
Incentive plan transactions (11,923) (13,707)
Repurchase of Common Stock (6,863) (2,283)
--------- ---------
Net Cash Flows (Used by) Financing Activities (67,991) (77,180)
--------- ---------
Increase in Cash and Cash Equivalents 15,862 27,590
Cash and Cash Equivalents, beginning of period 61,422 32,346
--------- ---------
Cash and Cash Equivalents, end of period $ 77,284 $ 59,936
========= =========
Interest Paid $ 12,038 $ 9,441
========= =========
Income Taxes Paid $ 12,592 $ 10,023
========= =========
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of the Corporation and its subsidiaries after elimination of
intercompany accounts and transactions. These statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 30,
1997, are not necessarily indicative of the results that may be expected
for the year ending December 31, 1997. For more information, refer to
the consolidated financial statements and footnotes included in the
Corporation's 1996 Annual Report on Form 10-K.
2. INTEREST EXPENSE
Interest expense, net consisted of the following:
For the Three Months Ended
--------------------------
March 30, 1997 March 31, 1996
-------------- --------------
(in thousands of dollars)
Interest expense $ 16,918 $ 13,871
Interest income (1,068) (892)
Capitalized interest (168) (755)
-------- --------
Interest expense, net $ 15,682 $ 12,224
======== ========
3. STOCK SPLIT
In August 1996, the Corporation's Board of Directors declared a
two-for-one split of the Common Stock and Class B Common Stock effective
September 13, 1996, to stockholders of record August 23, 1996. The split
was effected as a stock dividend by distributing one additional share
for each share held. Unless otherwise indicated, all shares and per
share information have been restated to reflect the stock split.
4. NET INCOME PER SHARE
Income per share has been computed based on the weighted average number
of shares of the Common Stock and the Class B Common Stock outstanding
during each period. A total of 143,849 shares of Common Stock was
repurchased during the first quarter of 1997 under the share repurchase
program begun in 1996. A total of 27,153,165 shares were held as
Treasury Stock as of March 30, 1997.
5. INVENTORIES
The majority of inventories are valued under the last-in, first-out
(LIFO) method. The remaining inventories are stated at the lower of
first-in, first-out (FIFO) cost or market. Inventories were as follows:
March 30, 1997 December 31, 1996
-------------- -----------------
(in thousands of dollars)
Raw materials $ 272,814 $ 204,419
Goods in process 35,726 31,444
Finished goods 320,472 316,726
---------- ---------
Inventories at FIFO 629,012 552,589
Adjustment to LIFO (81,574) (77,611)
---------- ---------
Total inventories $ 547,438 $ 474,978
========== =========
6. ACQUISITIONS AND DIVESTITURES
In January 1996, the Corporation completed the sale of the assets of
Hershey Canada Inc.'s PLANTERS nut and LIFE SAVERS and BREATH SAVERS
hard candy, and BEECH-NUT cough drops businesses to Johnvince Foods
group and Beta Brands Inc., respectively.
In December 1996, the Corporation acquired from an affiliate of
Huhtamaki Oy (Huhtamaki), Huhtamaki's Leaf North America (Leaf)
confectionery operations and sold to Huhtamaki the outstanding shares of
Gubor Holding GmbH (Gubor) and Sperlari, S.r.l. (Sperlari). For further
information, refer to the Corporation's 1996 Annual Report on Form 10-K.
7. LONG-TERM DEBT
In March 1997, the Corporation issued $150 million of 6.95% Notes due
2007 (Notes) under the November 1993 Form S-3 Registration Statement.
Proceeds from the debt issuance were used to repay a portion of the
commercial paper borrowings associated with the Leaf acquisition. As of
March 30, 1997 and December 31, 1996, $150.0 million and $300.0 million,
respectively, of commercial paper borrowings were reclassified as
long-term debt in accordance with the Corporation's intent and ability
to refinance such obligations on a long-term basis.
8. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term debt
approximated fair value as of March 30, 1997, because of the relatively
short maturity of these instruments. The carrying value of long-term
debt, including the current portion, also approximated fair value as of
March 30, 1997, based upon quoted market prices, as of those dates, for
the same or similar debt issues.
As of March 30, 1997, the Corporation had foreign exchange forward
contracts maturing in 1997 and 1998 to purchase $21.6 million in foreign
currency, primarily British sterling, German marks and Swiss francs, and
to sell $25.4 million in foreign currency, primarily Canadian dollars
and Japanese yen, at contracted forward rates.
The fair value of foreign exchange forward contracts is estimated by
obtaining quotes for future contracts with similar terms, adjusted where
necessary for maturity differences. As of March 30, 1997, the fair value
of foreign exchange forward contracts approximated carrying value. The
Corporation does not hold or issue financial instruments for trading
purposes.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation, from time to time, enters into interest rate
swap agreements to effectively convert a portion of its floating rate
debt to fixed rate debt. As of March 30, 1997 and March 31, 1996, the
Corporation had agreements outstanding with an aggregate notional amount
of $250.0 million and $200.0 million with maturities through 1999 and
1997, respectively. As of March 30, 1997 and March 31, 1996, interest
rates payable were at weighted average fixed rates of 6.1% and 5.6%,
respectively, and interest rates receivable were floating based on
30-day commercial paper composite rates. Any interest rate differential
on interest rate swaps is recognized as an adjustment to interest
expense during the period. The Corporation's risk related to swap
agreements is limited to the cost of replacing such agreements at
current market rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations - First Quarter 1997 vs. First Quarter 1996
- -----------------------------------------------------------------
Consolidated net sales for the first quarter rose from $931.5 million in 1996 to
$1,002.5 million in 1997, an increase of 8% from the prior year. The higher
sales primarily reflected incremental sales from the Leaf acquisition and from
the introduction of new confectionery products. These increases were offset
somewhat by lower sales resulting from the divestitures of the Gubor and
Sperlari businesses in December 1996 and a decline in sales of pasta and grocery
products.
The consolidated gross margin increased from 41.0% in 1996 to 41.2% in 1997. The
increase reflected the impact of confectionery selling price increases, improved
manufacturing efficiencies and the favorable impact of the divestitures of the
Gubor and Sperlari businesses. These favorable variances were partially offset
by the lower margin associated with the recently acquired Leaf business and
increases in manufacturing costs. Selling, marketing and administrative expenses
increased by 5%, due to increased marketing expenses associated with the
introduction of new products.
Net interest expense in the first quarter of 1997 was $3.5 million above the
comparable period of 1996 primarily as a result of increased borrowings
associated with the Leaf acquisition.
The first quarter effective income tax rate decreased from 40.1% in 1996 to
39.3% in 1997 primarily due to changes in the geographic mix of the
Corporation's income.
Financial Condition
- -------------------
Historically, the Corporation's major source of financing has been cash
generated from operations. Domestic seasonal working capital needs, which
typically peak during the summer, generally have been met by issuing commercial
paper. During the first three months of 1997, the Corporation's cash and cash
equivalents increased by $15.9 million. Cash provided from operations and
long-term borrowings was sufficient to repay $173.3 million of short-term
borrowings, finance capital additions of $38.0 million and pay cash dividends of
$30.0 million.
The ratio of current assets to current liabilities was 1.2:1 as of March 30,
1997 and December 31, 1996. The Corporation's capitalization ratio (total
short-term and long-term debt as a percent of stockholders' equity, short-term
and long-term debt) was 44% as of March 30, 1997, and 46% as of December 31,
1996.
As of March 30, 1997, the Corporation could borrow up to $600 million under its
committed credit facility agreements with options to increase borrowings by $1.0
billion. As of March 30, 1997, and March 31, 1996, the Corporation also had
lines of credit with domestic and international commercial banks in the amount
of approximately $20 million and $100 million, respectively, which could be
borrowed directly or used to support the issuance of commercial paper.
In March 1997, the Corporation issued $150 million of Notes under a November
1993 Registration Statement. As of March 30, 1997, $150 million of debt
securities remained available for issuance under the Registration Statement.
Proceeds from any offering of the $150 million of debt securities available
under the shelf registration may be used for general corporate requirements
including, reducing existing commercial paper borrowings, financing capital
additions, and funding future business acquisitions and working capital
requirements.
As of March 30, 1997, the Corporation's principal capital commitments included
manufacturing capacity expansion and modernization. The Corporation anticipates
that capital expenditures will be in the range of $175 million to $225 million
per annum during the next several years as a result of continued modernization
of existing facilities and capacity expansion to support new products and line
extensions.
Recent Pronouncements of the Financial Accounting Standards Board
- -----------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, Earnings Per share (FAS 128). FAS 128 specifies
the computation, presentation, and disclosure requirements for earnings per
share and is effective for periods ending after December 15, 1997. Adoption of
this accounting standard is not expected to have a material effect on the
earnings per share computations of the Corporation.
PART II
Items 1 through 3 and 5 have been omitted as not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Hershey Foods Corporation's Annual Meeting of Stockholders was held on April 29,
1997. The following directors were elected by the holders of Common Stock and
Class B Common Stock, voting together without regard to class:
Name Votes For Votes Withheld
---- --------- --------------
William H. Alexander 412,621,515 503,779
Robert H. Campbell 412,658,524 466,770
C. McCollister Evarts 412,518,401 606,893
Bonnie Guiton Hill 412,627,327 497,967
John C. Jamison 412,678,171 447,123
John M. Pietruski 412,585,063 540,231
Joseph P. Viviano 412,653,635 471,659
Kenneth L. Wolfe 412,771,455 353,839
The following directors were elected by the holders of the Common Stock voting
as a class:
Name Votes For Votes Withheld
---- --------- --------------
Mackey J. McDonald 97,451,439 12,610,435
Vincent A. Sarni 109,599,177 462,697
Holders of the Common Stock and the Class B Common Stock voting together
approved the Key Employee Incentive Plan, as amended. Stockholders cast
391,503,659 votes FOR the approval, 6,825,539 votes AGAINST the approval and
ABSTAINED from casting 1,049,984 votes on the approval of the Key Employee
Incentive Plan, as amended.
Holders of the Common Stock and the Class B Common Stock voting together
approved the appointment of Arthur Andersen LLP as the independent public
accountants for 1997. Stockholders cast 412,381,055 votes FOR the appointment,
387,713 votes AGAINST the appointment and ABSTAINED from casting 356,526 votes
on the appointment of accountants.
No other matters were submitted for stockholder action.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
--------
The following items are attached and incorporated herein by reference:
Exhibit 12 - Statement showing computation of ratio of earnings to fixed
charges for the quarters ended March 30, 1997 and March 31, 1996.
Exhibit 27 - Financial Data Schedule for the period ended March 30, 1997
(required for electronic filing only).
b) Reports on Form 8-K
-------------------
A report on Form 8-K was filed January 10, 1997, announcing that the
Corporation completed the acquisition of the Leaf North America
confectionery operations of Huhtamaki Oy (Huhtamaki) on December 30,
1996. The Corporation also completed the sale of its European
operations, Gubor Holding GmbH and Sperlari, S.r.l. to Huhtamaki on that
date.
A report on Form 8-K was filed February 26, 1997, announcing that the
Corporation, as part of the acquisition of the Leaf North America
business, entered into a Trademark and Technology license with Huhtamaki
giving Hershey the right to manufacture, market and distribute products
under certain Huhtamaki trademarks in North, Central and South America.
A report on Form 8-K was filed March 4, 1997, announcing the
Corporation's financial results for the year ended December 31, 1996.
A report on Form 8-K was filed March 7, 1997, announcing that the
Corporation entered into a Pricing Agreement concerning the issuance and
sale of $150 million of 6.95% Notes due March 1, 2007.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERSHEY FOODS CORPORATION
-------------------------
(Registrant)
Date May 7, 1997 /s/ William F. Christ
----------- ------------------------------
William F. Christ
Senior Vice President and
Chief Financial Officer
Date May 7, 1997 /s/ David W. Tacka
----------- -----------------------------
David W. Tacka
Corporate Controller and
Chief Accounting Officer
EXHIBIT INDEX
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 - Financial Data Schedule for the period
ended March 30, 1997 (required for electronic
filing only)
EXHIBIT 12
HERSHEY FOODS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands of dollars except for ratios)
(Unaudited)
For the Three Months Ended
March 30, March 31,
1997 1996
----------- --------
Earnings:
Income before income taxes $ 113,501 $ 99,190
Add (deduct):
Interest on indebtedness 16,750 13,116
Portion of rents representative of the
interest factor (a) 2,781 1,870
Amortization of debt expense 67 56
Amortization of capitalized interest 895 832
----------- ----------
Earnings as adjusted $ 133,994 $ 115,064
=========== ==========
Fixed Charges:
Interest on indebtedness $ 16,750 $ 13,116
Portion of rents representative of the
interest factor (a) 2,781 1,870
Amortization of debt expense 67 56
Capitalized interest 168 755
----------- ----------
Total fixed charges $ 19,766 $ 15,797
=========== ==========
Ratio of earnings to fixed charges 6.78 7.28
=========== ==========
NOTE:
(a) Portion of rents representative of the interest factor consists of
one-third of rental expense for operating leases.
5
1,000
3-MOS
DEC-31-1997
MAR-30-1997
77,284
0
245,651
0
547,438
1,021,227
2,458,508
854,616
3,238,290
841,333
629,856
0
0
179,950
1,009,387
3,238,290
1,002,469
1,002,469
589,281
873,286
0
0
15,682
113,501
44,607
68,894
0
0
0
68,894
.45
0
BALANCE IS NET OF RESERVES FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS.
